T.C. Memo. 1997-230
UNITED STATES TAX COURT
THOMAS J. RABIDEAU AND SANDRA M. RABIDEAU, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19249-95. Filed May 15, 1997.
Thomas J. and Sandra M. Rabideau, pro sese.
George W. Bezold, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
-2-
Respondent determined a deficiency in petitioners' Federal
income tax for the taxable year 1992, as well as an accuracy-
related penalty for negligence under section 6662(a), in the
amounts of $6,176 and $1,235, respectively.
Respondent subsequently conceded that petitioners are not
liable for the accuracy-related penalty. Accordingly, the sole
issue for decision is whether petitioners may exclude from gross
income the disability benefits that petitioner Thomas J. Rabideau
received from his former employer.2
FINDINGS OF FACT
Some of the facts have been stipulated, and they are so
found. Petitioners resided in Pardeeville, Wisconsin, at the
time that their petition was filed with the Court.
Petitioner Thomas J. Rabideau (petitioner) was employed by
Metropolitan Life Insurance Co. (Met Life) from no later than
1981 through 1989.
During 1989, Met Life maintained a "flexible benefits plan",
or "cafeteria plan", that allowed eligible employees to select
between different types of benefits and cash. Specifically, the
flexible benefits plan offered medical, dental, long-term
disability, and life insurance benefits to eligible employees of
Met Life.
2
An adjustment to petitioners' earned income credit is a
mechanical matter, the resolution of which depends on our
disposition of the issue for decision.
-3-
Met Life maintains a "Met Life Options Decision Book" (the
Met Life manual) that explains an employee's options under the
flexible benefits plan. The Met Life manual provides in
pertinent part as follows:
The Company currently spends money to pay for your
benefits. * * * The contribution you receive will pay
for most of the cost of coverage for you and for your
dependents. The cost you pay, if any, will depend on
the options you select under the Met Life Options
program.
* * * * * * *
If you select lower levels of coverage * * * the cost
may be less than the Company's contribution for you.
Then you will receive extra dollars in your pay
throughout the year. Of course, you will have to pay
taxes on these extra dollars.
If you select higher levels of coverage * * * the cost
may be more than the Company's contribution for you.
Then you will pay the difference. But you pay this
remaining cost with before-tax dollars, so you reduce
your taxes.
The amount of the "Company's contribution" (the Met Life
contribution) is not a static figure, but is based instead on the
number of dependents for whom an employee selects medical and
dental coverage.3 Thus, the Met Life contribution is greater for
employees who select medical and dental coverage for themselves
and their dependents than it is for employees who select such
coverage for themselves but not their dependents. Similarly, the
3
The Met Life contribution also includes an amount for life
insurance and long-term disability benefits, which amount is
independent of the number of an employee's dependents.
-4-
Met Life contribution is greater for employees who select medical
and dental coverage for themselves but not their dependents than
it is for employees who do not select any medical and dental
coverage. Specifically, employees who select medical and dental
coverage for themselves and two or more dependents receive a Met
Life contribution in the amount of $4,811, whereas employees who
select medical and dental coverage for themselves but not their
dependents receive a Met Life contribution in the amount of
$1,990. Employees electing not to receive any medical or dental
benefits receive a Met Life contribution in the amount of $881.
The cost of employee benefits is determined by the type and
level of coverage selected and, in the case of medical and dental
benefits, also by the number of covered dependents. For
employees selecting lower levels of coverage (e.g., less life
insurance or higher deductibles), the cost is less than for
similarly situated employees selecting higher levels of coverage
(e.g., more life insurance or lower deductibles).
Although employees are not required to select either medical
or dental coverage, employees are required to select long-term
disability coverage and life insurance coverage. However,
employees may choose among several options for each type of
required coverage. In the case of long-term disability, the
options involve coverage based on different replacement-of-salary
percentages, which range from 50 percent of salary to 60 percent
-5-
of salary.4 In the case of life insurance, the options involve
coverage based on different multiples of salary, which range from
1 times salary to 4 times salary.
According to the Met Life manual, if the cost of the
selected benefits is less than the Met Life contribution, then
the excess of the Met Life contribution over the cost of the
selected benefits is distributed to the employee as cash in his
or her wages. On the other hand, if the cost of the selected
benefits is greater than the Met Life contribution, then the
excess of the cost of the selected benefits over the amount of
the Met Life contribution is deducted from the employee's wages
on a pre-tax basis.
On November 10, 1988, petitioner completed an enrollment
form for participation in Met Life's flexible benefits plan for
1989. On that form, petitioner selected the following "before-
tax" benefits: (1) Medical benefits for himself and his
dependents; (2) dental benefits for himself and his dependents;
(3) long-term disability benefits at 60 percent of salary; and
(4) life insurance benefits at 4 times salary. The cost for each
of these benefits was $4,448, $495, $502, and $288, respectively,
for a total cost of $5,733. The applicable Met Life contribution
applied against the total cost was $4,811. The difference
4
The amount of disability benefits is also related to the
number of years of service that an employee accrues prior to the
date of his or her disability.
-6-
between the total cost of coverage selected by petitioner and the
amount of the Met Life contribution, i.e., $5,733 less $4,811 or
$922, was deducted from petitioner's wages on a pre-tax basis.
In August 1989, petitioner was injured and filed a claim for
disability benefits. For 1992, the taxable year in issue,
petitioner received disability benefits from Met Life in the
amount of $35,520.60. The amount of such benefits was based on
the applicable percentage of petitioner's salary and his years of
service prior to the date of his disability.
Met Life issued petitioner a Form W-2 (Wage and Tax
Statement) for 1992. On such form, Met Life characterized the
disability benefits that were paid to petitioner as compensation.
On their 1992 Federal income tax return, petitioners did not
report as income the disability benefits that petitioner received
from Met Life. In the notice of deficiency, respondent
determined that such benefits constituted taxable income.
Respondent also determined that petitioners were liable for an
accuracy-related penalty for negligence under section 6662(a).5
OPINION
As a general rule, section 104(a)(3) excludes from an
employee's gross income amounts received through accident or
health insurance for personal injuries or sickness. However, the
section provides an exception for amounts received by an employee
5
As previously stated, respondent subsequently conceded the
accuracy-related penalty.
-7-
to the extent such amounts are either paid by the employer or are
attributable to employer contributions that were not includable
in the employee's gross income.6
Section 105(a) coordinates with section 104. As a general
rule, section 105(a) provides that amounts received by an
employee through accident or health insurance for personal
injuries or sickness shall be included in gross income to the
extent such amounts are either paid by the employer or are
attributable to contributions by the employer that were not
included in the employee's gross income.
Section 105(c) sets forth an exception to the general rule
of subsection (a). Thus, section 105(c) provides in relevant
part as follows:
(c) Payments Unrelated to Absence From Work.--
Gross income does not include amounts referred to in
subsection (a) to the extent such amounts--
(1) constitute payment for the permanent loss
or use of a member or function of the body * * *,
and
(2) are computed with reference to the nature
of the injury without regard to the period the
employee is absent from work.
6
See Trappey v. Commissioner, 34 T.C. 407 (1960)
(disability income is received through accident or health
insurance for personal injuries or sickness within the meaning of
sec. 104(a)(3)); see also sec. 105(e)(1) (for purposes of secs.
104 and 105, amounts received under an accident or health plan
for employees are treated as amounts received through accident or
health insurance).
-8-
Finally, section 106 works in conjunction with section
104(a)(3) and section 105(a). Section 106 excludes from an
employee's gross income the cost of employer-provided coverage
under an accident or health plan. Thus, if employer
contributions are not included in the employee's gross income
under section 106, the benefits attributable to such
contributions are governed by the inclusionary rule of section
105(a), rather than by the exclusionary rule of section
104(a)(3).
Petitioners contend that the disability payments received by
petitioner are attributable to contributions made by petitioner
and, thus, are excluded from petitioners' gross income under
section 104(a)(3). Specifically, petitioners argue that the
money used to pay the premiums for petitioner's long-term
disability policy would have been received by petitioner in his
weekly paycheck if he had selected cash in lieu of benefits.
From this, petitioners conclude that petitioner's disability
benefits are attributable to contributions made by petitioner,
rather than by Met Life. Alternatively, petitioners argue that
petitioner's disability payments are excludable from gross income
under section 105(c).
Respondent contends that petitioners must include
petitioner's disability benefits in gross income under section
105(a) because such benefits are attributable to contributions
-9-
made by Met Life that were not includable in petitioners' gross
income.
We begin by addressing petitioners' primary contention that
the contributions for petitioner's disability benefits were paid
with funds that petitioner could have received if he had elected
to receive cash in lieu of benefits.
Petitioners' contention is not supported by the record.
Here we recall that Met Life employees were required to select
long-term disability coverage (as well as life insurance
coverage). Petitioner did not have the option, therefore, of
forgoing long-term disability coverage and receiving instead cash
in an amount equivalent to the cost of such coverage. In other
words, petitioner could not have increased his take home pay by
forgoing long-term disability coverage (or by forgoing life
insurance coverage).
We further recall that the cost of the coverage for long-
term disability and life insurance, which coverage petitioner was
required to select, was less than the Met Life contribution of
$881 that was allocable to petitioner if he did not select any
medical and dental coverage. In other words, the cost of the
required coverage, given the options as selected by petitioner,
was $790 (i.e., $502 for long-term disability and $288 for life
insurance), and this amount was $91 less than the aforementioned
Met Life contribution of $881. Thus, Met Life effectively paid
- 10 -
in full the cost of petitioner's long-term disability coverage.
Pursuant to section 105(a), the long-term disability benefits
received by petitioner pursuant to such coverage would therefore
be includable in petitioners' gross income.
Petitioners seek to avoid the foregoing conclusion by
focusing on the fact that petitioner selected benefits for which
the total cost ($5,733) exceeded the Met Life contribution
($4,811). Because such excess (i.e., $922) was deducted from
petitioner's wages, and because such excess exceeded the cost of
petitioner's long-term disability coverage, petitioners argue
that petitioner's long-term disability benefits should be
excluded from gross income.
Petitioners' argument overlooks the fact that the cost of
petitioner's benefits exceeded the Met Life contribution only
because petitioner selected medical and dental coverage for
himself and his dependents. In other words, the excess of the
total cost of benefits over the Met Life contribution is
allocable to the cost of medical and dental coverage and not to
the cost of long-term disability coverage. Indeed, as previously
stated, the combined cost of long-term disability coverage and
insurance coverage was $91 less than the Met Life contribution if
petitioner had forgone medical and dental coverage.
In summary, after careful consideration, we conclude that
the cost of petitioner's long-term disability coverage was
- 11 -
attributable to petitioner's employer, Met Life, and that, as a
consequence, section 104(a)(3) does not serve to exclude
petitioner's long-term disability benefits from petitioners'
gross income.
Having so concluded, we turn to petitioners' contention
regarding the exclusion of petitioner's disability benefits under
section 105(c).
For disability benefits to qualify for exclusion under
section 105(c), the payments must be computed with reference to
the nature of the injury. This requirement is met only if the
plan varies the benefits according to the type and severity of
the taxpayer's injury. Rosen v. United States, 829 F.2d 506, 510
(4th Cir. 1987); Beisler v. Commissioner, 814 F.2d 1304, 1307-
1308 (9th Cir. 1987), affg. en banc T.C. Memo. 1985-25; Hines v.
Commissioner, 72 T.C. 715, 720 (1979).
In the instant case, the disability benefits received by
petitioner were not based on the type and severity of the injury
suffered. Rather, the amount of the benefits that petitioner
received was determined by the amount of his salary and his years
of service prior to his disability. Thus, because petitioner's
disability coverage did not compute the amount of the benefits
with reference to the nature of the injury as required by section
105(c)(2), petitioner's disability benefits are not excludable
from gross income under such section.
- 12 -
We have carefully considered petitioners' remaining
arguments and find them unavailing.7
In conclusion, because the entire cost of petitioner's
disability benefits was attributable to petitioner's employer,
Met Life, and because such benefits were not computed with
reference to the nature of petitioner's disability, such benefits
must be included in petitioners' gross income pursuant to section
105(a).
To reflect our disposition of the disputed issue, as well as
respondent's concession,
Decision will be entered
for respondent as to the
deficiency in income tax and
for petitioners as to the
accuracy-related penalty.
7
Petitioners rely, in part, on the following statement in
IRS Publication 525 at 9 (Taxable and Nontaxable Income): "If you
pay the entire cost of a health or accident insurance plan, do
not include any amounts you receive for your disability as income
on your tax return." In view of our holding that Met Life paid,
or is deemed to have paid, the cost of petitioner's long-term
disability coverage, the foregoing statement is inapposite. Even
if this were not the case, we note that informal IRS publications
are not authoritative sources of Federal tax law; rather,
applicable statutes, regulations, and judicial decisions
constitute the authoritative sources of law that inform our
decisions. E.g., Zimmerman v. Commissioner, 71 T.C. 367, 371
(1978), affd. without published opinion 614 F.2d 1294 (2d. Cir.
1979); Green v. Commissioner, 59 T.C. 456, 458 (1972).